Image Source: Unsplash

A ski mountain looks very different whether you’re at the bottom, the middle, or the top. The same can be said for markets. As an avid skier, though one who has never been to Jackson Hole, I believe that the analogy nonetheless applies. The lifts may be closed now, but we can once again call on Fed Chair Powell to be our mountain guide when he speaks tomorrow. He might let us know whether we should continue to ride the chairlift higher, and if not, whether the route will be gentle or steep.

We have been voicing concerns ahead of tomorrow’s speech for a few reasons.  For starters, the S&P 500’s track record after the past few Jackson Hole conferences has been uninspiring:

S&P 500 Performance Before and After Powell’s Recent Jackson Hole Speeches

Source: Interactive Brokers

Of course, three annual observations is hardly a robust sample size, but it is worth noting that the S&P 500 (SPX) was down four and five weeks after each of the last occurrences. That may be attributable as much to September seasonality as it is to the speeches themselves, but those speeches indeed played a role in setting the tone for the weeks that follow.

A further concern arises from whether investors have put too much faith in a conflicting set of expectations. It is clear that the basic economic scenario is for a soft landing. Even though historical sightings of a soft landing are about as common as credible sightings of a Yeti, earnings estimates for the coming year are solidly higher – something that implies that we will avoid a recession.  

Yet that basic scenario also implies that we should expect Fed Funds to be a full percentage point lower by the end of the year, implying that at least one of the remaining three FOMC meetings will offer a 50bp cut. CME futures imply a 93% probability of Fed Funds being 1% lower after the December meeting, though the IBKR ForecastTrader shows a 34% chance that the rate will be above 4.625% at that point. (Seems like a potentially tradeable divergence, no?)

Now ask yourself whether those expectations might be mutually exclusive. It seems quite possible. To be fair, we began the year with an impossible conundrum – expectations for a solid economy AND six or seven rate cuts – but we’ve done just fine because the economy delivered and the cuts weren’t needed. Now, when we’re faced with the prospect of a slowing economy – even though the current Atlanta Fed GDPNow projects 2% growth this quarter – we are quite hopeful that aggressive Fed cuts will benefit investors instead.

And so we will find out if Chair Powell is willing to accommodate investors’ hopes for those cuts, the cuts that many believe are necessary to forestall economic woes. It is fair to expect that a 25-basis point cut will arrive next month since Powell and other Fed officials have implied that is in the cards. But what if he simply reiterates data dependence and a tendency towards rate-cutting caution.  That doesn’t seem to fit with investors’ expectations.  Will we then need to root for lousy jobs numbers in two weeks to justify the need for cuts?  

Jackson Hole has a reputation for being among the most challenging ski areas in the world. Will Powell guide us towards a pleasant scenic ride, or perch us at the top of a treacherous couloir and leave us to our own devices?

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